Remarks at the Third Annual Conference on the Evolving Structure of the U.S. Treasury Market
Chairman Jay Clayton
New York, N.Y.
Nov. 28, 2017
Thank you, Michael [Strine], for that kind introduction. I am delighted to join all of you at the Third Annual Conference on the Evolving Structure of the U.S. Treasury Market. I also want to thank the Board of Governors of the Federal Reserve System, the Department of the Treasury, the Federal Reserve Bank of New York, and the Commodity Futures Trading Commission (CFTC) for your efforts in organizing this excellent event and co-sponsoring it with the SEC.
My remarks today will focus on three topics. First, I will elaborate on one of my core principles as SEC Chairman—strong and close regulatory coordination—and its importance to oversight of the global capital markets, including the Treasury market. Second, I will make some Treasury market specific observations concerning the importance of trading data to regulators, including the SEC. Third, I will discuss my views regarding the SEC’s approach to the future regulation of certain other aspects of the fixed income markets, including areas that I expect will be explored by our new Fixed Income Market Structure Advisory Committee.
Regulatory Coordination and Its Importance to the Treasury Market
In July, I gave my first major policy speech as SEC Chairman and articulated eight principles that should guide the work of the SEC as we advance our tripartite mission to protect investors, ensure fair, orderly and efficient markets, and facilitate capital formation.
One of those principles is efficient and effective regulatory coordination. The SEC shares the financial services space with many other regulators and governmental entities that oversee related and overlapping industries and market participants, including those in the fixed income markets.
Coordination among those bodies—locally, nationally and internationally—is essential to a well-functioning regulatory environment and, in turn, well-functioning markets. Said another way, inconsistent, duplicative, fragmented, and unilateral regulation, is at best inefficient and, all too often, provides the seeds for market failures and improper conduct. These inefficiencies and failures have lasting effects on individuals, firms and our economy more generally.
Turning to the Treasury market, the importance of regulatory cooperation is readily apparent. Oversight of the Treasury market is shared by a variety of authorities. For example:
- The Treasury Department has authority to write rules for transactions in government securities, including Treasury securities, by government securities broker-dealers.
- The SEC, the Financial Industry Regulatory Authority (FINRA), the federal bank regulators, the CFTC and the National Futures Association (NFA) regulate many—but not all—of the individuals and firms that participate in the Treasury securities and futures markets.
- Enforcement and examination authority over activities in these markets resides with the SEC, FINRA, the bank regulators, the CFTC and the NFA.
Add to this mix the fact—a fact not well understood outside the arenas inhabited by market professionals and financial regulators—that Treasury securities are involved in, or provide a reference point for, countless transactions in important fixed income and derivative markets. And, these important markets also are overseen by multiple regulators. I could go on, but suffice it to say, close coordination with respect to the oversight of the Treasury market is critical for each of us to fulfill our respective missions.
A related point that I have made before is also worth reiterating. Not only is coordination between and among regulators and government authorities critical—but coordination and open communication between regulators and the various participants in the markets that they oversee is also vitally important. At the SEC, we are striving to continuously invest in our knowledge of the markets, firms, and individuals we regulate, as well as those we strive to protect. I have instructed our staff to endeavor to engage with, listen to, and learn from investors and industry participants. These efforts enhance our ability to identify and understand emerging risks, new trading practices, evolving technologies, and changing competitive dynamics, among many other important considerations. Conversely, I expect that investors and many industry participants benefit from open dialogue with us and other regulators—for example, by learning about our priorities and viewpoints.
I am pleased to observe that close regulatory coordination and cooperation has been on clear display in the Treasury market space over the past several years. For instance, in the wake of the unusually high volatility in the Treasury markets on October 15, 2014, the staffs of various regulators worked together to analyze what occurred and jointly prepared an insightful and well-written report. Subsequently, there has been excellent collaboration on other Treasury market regulatory initiatives as well, including the development and launch of TRACE reporting for Treasuries and the sharing of TRACE data and related analyses among regulators.
This conference itself is emblematic of regulatory coordination and communication. Today’s event provides us, as regulators, with a valuable opportunity to communicate our perspectives to you, the industry. At the same time, this event allows us to gather insights from you. To the investors and industry members in attendance: Thank you for contributing to this conference and for your continued, candid engagement with the regulatory community.
Treasury Market Data
I would like to turn now to one of the more noteworthy Treasury market regulatory issues: Treasury market data.
Let me begin by stating my view that regulators should have access to comprehensive Treasury market trading data. As I mentioned, but it bears repeating, the Treasury market is fundamental to our economy. It serves as the primary means of financing the federal government. It is the deepest and most liquid government securities market in the world. That is just the beginning. Treasury securities and the Treasury market perform many key roles in the global financial system, including serving as a key investment instrument and hedging vehicle for investors around the world, and as a widely-accepted benchmark for many other financial instruments, to name just a few.
Therefore, we at the SEC, as well as the other authorities responsible for this market and other markets, need a clear and precise understanding of the trends, dynamics and risks in the Treasury market. The need for readily available Treasury market data was made clear by the events of October 15 – a little over three years ago. It has been noted that much of the eight months that it took for the interagency working group to produce the joint report regarding the events of October 15 was spent on data collection, data reconciliation and analysis across the agencies.
That said, a significant step forward occurred last October when the SEC, in consultation with the Treasury Department and other regulators, approved a FINRA rule change that requires FINRA member broker-dealers to report transactions in Treasury securities to FINRA’s TRACE system. So, as of the effective date this July, regulator access to Treasury security data is much improved, in both scope and timing.
Let me take a moment to explain in more specific terms the benefits of TRACE for Treasuries to the SEC and how it supports our mission. Access to Treasury transaction data allows us to more swiftly and efficiently reconstruct, analyze and diagnose the causes and effects of market events such as those of October 15. Treasury market transaction data also enhances our ability to monitor the market, and thereby bolsters our rulemaking, examination and enforcement capabilities. Staff in our Divisions of Economic and Risk Analysis, Trading and Markets, and Enforcement, and in our Office of Compliance Inspections and Examinations are increasingly using data of this type to drive our approach to rulemaking and our other regulatory functions. Simply put, the data helps us understand, oversee and police the markets more effectively—and ultimately establish more efficient rules and better protect investors.
As always in our dynamic world, there is more work to do in this area. Although the amount of data recently made reportable to TRACE greatly enhances the ability of regulators to understand and monitor activity in the Treasury securities market, data gaps remain. The Treasury Department recently discussed this issue in its Capital Markets Report. It is worth taking a few moments to highlight the topic.
Many proprietary trading firms—or “PTFs”—that are highly active in the Treasury market are not FINRA member broker-dealers, and, therefore are not required to report their trading in Treasuries to FINRA’s TRACE system. Today, a significant portion of PTF trading activity is reported to TRACE by the broker-dealer operators of the major electronic interdealer platforms, but such PTF activity is essentially anonymous in the TRACE data. Similarly, many banks that participate in the Treasury market are not FINRA member broker-dealers and also do not report their transactions to TRACE. As a result, TRACE currently does not provide a complete and detailed audit trail of Treasury market activity.
In its Capital Markets Report, the Treasury Department made several thoughtful recommendations to address this issue.
- First, the Treasury Department recommended that regulators consider requiring the broker-dealers that operate the major electronic interdealer Treasury platforms to specifically identify the PTFs in the trade reports that the platform operators submit to TRACE. This approach, which would require a FINRA rule change that would need to be approved by the SEC, may help close the gap in the granularity of PTF data. The Treasury Department noted that it intends to explore this potential approach with FINRA and the SEC.
- Second, regarding bank activity, the Treasury Department noted that it supports the Federal Reserve Board’s stated plans to collect data from banks for transactions in Treasuries.
- Third, and in respect of Treasury futures activity, the Treasury Department recommended that the CFTC share the Treasury futures transaction data that it collects from the CME Group with Treasury, which Treasury believes could improve cross-market monitoring of Treasury cash and futures trading activity.
I commend the Treasury Department for these thoughtful and constructive recommendations. I am supportive of exploring these approaches and other initiatives that would provide regulators with a more complete view of Treasury market activities. I look forward to working with Treasury and other regulators on ideas and initiatives along the lines of those recommended by Treasury.
I want to pause here and commend the Treasury Department more broadly for their “core principles” reports. The reports are comprehensive and reflect the input and perspectives of a diverse array of market participants, including, importantly, long-term retail investors.
The SEC’s New Fixed Income Market Structure Advisory Committee
I will now turn to the Commission’s new Fixed Income Market Structure Advisory Committee—or “FIMSAC” as many of us at the Commission call it.
The Committee, whose initial focus will be on the corporate and municipal bond markets, will advise the Commission on the efficiency and resiliency of these markets and help us identify opportunities for regulatory improvements. I have long believed that there should be additional regulatory focus on these important and growing markets, notwithstanding several meaningful and impactful regulatory initiatives in recent years. Indeed, the corporate and municipal debt markets are particularly significant to retail investors, as well as American companies and our national infrastructure.
Individual investors are key participants in the corporate and municipal debt markets, both directly as retail investors and indirectly through investment funds, such as pension funds and other pooled vehicles, including as insurance owners and beneficiaries. Companies across the country issue corporate bonds to borrow money to help grow their businesses, fund their operations, and create jobs. State and local governments issue municipal bonds to finance a wide range of public projects and provide cash flows for governmental needs, among other things.
I expect that FIMSAC will help the Commission ensure that our regulatory approach to these markets reflects (1) where these markets are today and (2) the needs of Main Street investors, as well as companies and state and local governments.
The Commission has selected a top notch and diverse group of outside experts to serve on the Committee. Members of FIMSAC will represent the views of retail and institutional investors, small and large issuers, trading venues, and dealers, as well as FINRA and the Municipal Securities Rulemaking Board (MSRB), among others. I would like to thank Commissioners Stein and Piwowar for their thoughtful and highly collaborative approaches to our establishment of the Committee and our selection of its initial members, as well as the staff for their hard work to stand the Committee up in a short amount of time.
We intend to hold the first public FIMSAC meeting in January at the Commission’s headquarters in Washington.
I will now offer a few preliminary thoughts on topics and questions that the Committee might address.
I expect that early in its tenure the Committee will tackle the complex issue of bond market liquidity. There has been a tremendous amount of discussion about liquidity since the financial crisis and the regulatory responses that followed, which has raised many important questions that I hope the Committee will explore. For instance, have reductions in some dealers’ inventories affected broad bond market liquidity to a meaningful extent, and, if so, to what degree have these reductions been caused by regulatory requirements, market forces, or both? What are the effects of the growth in bond funds and exchange traded products on the liquidity of the underlying fixed income securities? Will these effects be different (and more adverse or more significant) if market dynamics change? Are there regulatory measures that should be taken to address the potential liquidity effects of exchange traded products? Are developments in secondary trading, including the rise of electronic matching platforms, impacting bond market liquidity — positively or negatively?
Separate from liquidity-focused issues, there are a number of other issues and questions that I would like the Committee to consider. For example:
- What are the broad implications of the growth and proliferation of bond funds and exchange traded products? Market participants make strong arguments that they benefit retail investors. On the other hand, others question whether bond funds and ETPs create market volatility concerns.
- Should the Commission undertake efforts with respect to pre-trade transparency in these markets? What are the potential costs and benefits of both regulator-only pre-trade transparency and public pre-trade transparency?
- How is technology changing these markets? For instance, what are the impacts of algorithmic trading strategies?
I believe that FIMSAC, given its diverse perspectives, is the appropriate body to address these—and similar—questions.
Finally, as I have stated before, I strive to analyze every decision that we make at the Commission by asking myself whether we are acting in the best interests of long-term individual investors, or “Mr. and Ms. 401(k)” as I often refer to them. I urge the FIMSAC members to use this lens to approach their work with the Committee. Additionally, investor education is also a great priority of mine. I have concerns, for example, about whether the average individual investor participating in the fixed income markets understands basic principles of these markets. I ask the Committee to proactively identify areas where significant knowledge gaps exist and offer ideas for closing those gaps effectively.
In closing, I would like to express my gratitude to the FIMSAC members for their willingness to serve. I look forward to working with you on these important issues.
To all of you here in attendance, I hope you enjoy the rest of the conference. Thank you.
My remarks are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.
 See Remarks at the Economic Club of New York, SEC Chairman Jay Clayton (July 12, 2017), available at https://www.sec.gov/news/speech/remarks-economic-club-new-york.
 See Opening Remarks at the National Compliance Outreach Program for Broker-Dealers, SEC Chairman Jay Clayton (July 27, 2017), available at https://www.sec.gov/news/public-statement/clayton-statement-cco-program-broker-dealers.
 See Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (July 13, 2015), available at https://www.sec.gov/files/treasury-market-volatility-10-14-2014-joint-report.pdf.
 See A Financial System That Creates Economic Opportunities: Capital Markets, Report to President Donald J. Trump (Oct. 2017) (“Capital Markets Report”), at 71, available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
 See Treasury Markets: Data, Oversight and Transparency, Remarks at the Evolving Structure of the U.S. Treasury Market: Second Annual Conference, Department of the Treasury Counselor Antonio Weiss (Oct. 24, 2016).
 FINRA does not disseminate the trading data publicly, but makes it available to the SEC and Treasury.
 The consolidated audit trail (“CAT”) that is currently being developed by FINRA and the national securities exchanges, pursuant to an NMS plan and Rule 613 of Regulation NMS, will collect data relating to NMS securities, which generally include U.S. exchange-listed stocks and equity and equity index options. The CAT will not collect data on Treasury market activities.
 See Capital Markets Report at 79-80.
 See id. at 80.
 See id.
 See id.
 Capital Markets Report; A Financial System That Creates Economic Opportunities: Banks and Credit Unions, Report to President Donald J. Trump (June 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf; A Financial System That Creates Economic Opportunities: Asset Management and Insurance, Report to President Donald J. Trump (Oct. 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-That-Creates-Economic-Opportunities-Asset_Management-Insurance.pdf.
 Other SEC Commissioners have also elevated the issue of fixed income market structure. See, e.g., Remarks at FINRA’s 2016 Fixed Income Conference, SEC Commissioner Michael S. Piwowar (Sept. 7, 2016), available at https://www.sec.gov/news/speech/piwowar-remarks-finra-2016-fixed-income-conference.html; Remarks Regarding the Fixed Income Markets at the Conference on Financial Markets Quality, SEC Commissioner Daniel M. Gallagher (Sept. 19, 2012), available at https://www.sec.gov/news/speech/2012-spch091912dmghtm.
 Significant regulatory initiatives in these areas include, among others, the introduction of FINRA’s TRACE system in 2002, and its subsequent expansions; the SEC’s 2012 issuance of the municipal securities market report following a broad review of the municipal securities market, and related rulemakings, including a new MSRB best execution rule for municipal securities; the publication by the MSRB and FINRA of separate, but consistent interpretive guidance on their respective best execution rules; new FINRA and MSRB rules concerning the disclosure of corporate and municipal bond mark-ups and new MSRB requirements for determining the prevailing market price of a municipal security; and the publication by the MSRB and FINRA of separate, but consistent interpretive guidance on their respective mark-up disclosure rules.
 See “SEC Announces the Formation and First Members of Fixed Income Market Structure Advisory Committee,” SEC Press Release (Nov. 9, 2017), available at https://www.sec.gov/news/press-release/2017-209.
 Members of the Commission staff are currently developing educational materials geared toward retail investors in fixed income products. For instance, staff are preparing a series of Investor Bulletins targeted to prospective and existing retail investors in municipal securities, which will provide basic, plain-language information concerning the characteristics, features and pricing of municipal bonds.